First Trust Multi Cap Growth AlphaDEX Fund (FAD)
The First Trust Multi Cap Growth AlphaDEX Fund (FAD) buys stocks that are growing their earnings and revenues faster than the average company, with an algorithmic screen layered on top to avoid growth traps — companies that are expanding but are so overvalued or fragile that they will collapse when reality hits. It is growth investing with a discipline filter built in.
At its foundation, growth investing is built on the observation that companies expanding their earnings faster than the average will, over long periods, deliver better stock returns than the overall market. Investors will pay premium valuations for that growth — a higher price-to-earnings multiple or a higher price-to-sales ratio — because the future cash flows that growth promises are valuable. This is not a guaranteed edge; stretches of years can pass where growth underperforms. But the historical record across decades suggests that portfolios tilted toward growing companies do tend to outpace those tilted toward mature, slow-growing ones.
FAD, run by First Trust, is built on this principle. It screens the universe of large-cap and mid-cap US stocks for those showing signs of genuine growth — accelerating revenues, expanding profit margins, rising earnings per share — and then constructs a diversified portfolio around them. The screening is not mechanical. The fund applies AlphaDEX, a proprietary algorithm from Morningstar’s index division, which ranks growth stocks not just on how fast they are growing, but on the sustainability and quality of that growth.
The reason AlphaDEX adds a layer to simple growth screening is intuitive. A company might be expanding earnings at forty percent per year, but if it is financed with debt that is barely serviceable, if its growth is concentrated in a single customer or market, or if it is trading at a valuation so stretched that it has already priced in years of perfect execution, then the growth is a mirage. The company looks good until it does not. AlphaDEX attempts to discriminate between real, sustainable growth and the kind of growth that collapses when growth slows or when rates rise.
The algorithmic ranking combines traditional growth metrics with value and momentum signals. A company with improving fundamentals and positive recent price momentum scores higher than one with decelerating growth or deteriorating sentiment, even if both are technically growing. The fund rebalances periodically, typically monthly or quarterly, shifting capital toward stocks hitting fresh highs on the AlphaDEX score and away from those showing deterioration. This active rebalancing is more expensive to operate than a static, buy-and-hold approach, but it aims to keep the portfolio responsive to changes in the growth landscape.
Where does FAD end up invested? Mostly in technology, healthcare, and consumer discretionary — the sectors where the most dynamic growth opportunities cluster. But it also holds industrials, materials, and other sectors because growth exists everywhere; the screens just happen to find more of it in innovation-driven sectors. The fund holds typically fifty to a hundred-and-fifty stocks, which provides diversification against any single company’s stumble while maintaining a focused bet on the growth premium.
Holding growth stocks is inherently more volatile than holding the broad market. Growth companies are sensitive to interest-rate moves because their profits are concentrated years in the future; if investors can earn a risk-free return from Treasury bonds, they are less willing to pay up for earnings that lie far ahead. When rates rise, growth stocks often face sharp drawdowns. Recessions hurt as well, because even fast-growing companies see earnings forecasts slashed when the economy tightens. FAD has experienced multi-year periods of underperformance, and any investor considering it must be prepared for volatility and for stretches where cheaper, slower-growing stocks actually outpace it.
The competitive terrain for growth-oriented ETFs is crowded. Hundreds of funds pursue growth strategies, from passive indexes that mechanically own all growth-classified stocks to actively managed competitors attempting to beat growth benchmarks through disciplined stock-picking. FAD’s edge, if it exists, comes from AlphaDEX’s screening methodology and First Trust’s operational track record, but that edge is modest and far from guaranteed. Nothing assures that the algorithm’s assumptions about what makes sustainable growth will remain accurate or that the fund will outperform other growth vehicles.
FAD charges an expense ratio that sits between the very low cost of a passive index ETF and the higher fees of an actively managed mutual fund. The fund itself trades on the NASDAQ with the liquidity and intra-day pricing that all ETFs offer, because the underlying holdings are widely traded, liquid growth stocks that create tight bid-ask spreads.
The fund is best suited to investors with a long time horizon — at least a decade or more — who have high tolerance for volatility and conviction in the long-term growth premium. It can serve as a complement to a value-tilted portfolio, providing exposure to the faster-growing, more expensive end of the market. For investors approaching retirement or seeking steady capital preservation, a growth fund like FAD is likely too volatile unless it occupies only a small, satellite portion of a larger, balanced allocation. Before committing capital, potential investors should examine FAD’s historical returns across multiple market cycles, compare them to simpler growth indexes and competing growth ETFs, and read Morningstar’s description of the AlphaDEX methodology to understand what distinguishes it from more straightforward growth screens.